Garanti Finansal Kiralama A.S. V. Aqua Marine & Trading Inc.

The Tulane Maritime Law Journal is proud to present the second installment in a series of forthcoming posts concerning recent developments in admiralty and maritime law written by members of the Tulane Maritime Law Journal.

Aqua Marine and Trading Inc. (Aqua Marine), a bunker supplier, initiated arbitral proceedings against Garanti Finansal Kiralama A.S. (GFK) for failure to pay for bunkers provided to two GFK-owned vessels pursuant to an arbitration clause in its confirmation contracts. GFK objected to Aqua Marine’s request for arbitration and sought a declaratory judgment that it was not bound to arbitrate. It argued that CMR Denizcilik Veticaret A.S. (CMR), the party that signed the bunker confirmation orders, was neither its “manager” nor its agent and could not bind it to the confirmation contracts. Instead, GFK speculated that the ships had been bareboat chartered and that the charterers had hired CMR to manage the vessels. GFK argued that, because of these bareboat charter agreements, it had relinquished all control over the vessels except for legal title. However, the United States District Court for the Southern District of New York held that GFK failed to present sufficient evidence to prove that CMR was not acting as its manager when it signed the confirmation contracts with Aqua Marine and dismissed the case.

GFK appealed the matter to the United States Court of Appeals for the Second Circuit, arguing that the district court erred in dismissing the case. The Second Circuit considered sua sponte whether it had jurisdiction over GFK’s declaratory judgment action. Looking to Skelly Oil Co. v. Phillips Petroleum Co. for guidance, the Second Circuit analyzed the claim through the lens of a coercive suit. In Skelly Oil, the United States Supreme Court held that for a federal court to have subject-matter jurisdiction over a Declaratory Judgment Act action, it must first establish that it would have jurisdiction over a hypothetical coercive suit involving the same claims and parties. If a federal question only arises as a defense to a state-law claim, then a federal court is barred from exercising jurisdiction pursuant to the well-pleaded complaint rule. Here, the Second Circuit’s application of Skelly Oil was noteworthy because no federal appeals court had previously applied the doctrine when determining an admiralty jurisdiction question.

The court held that a hypothetical admiralty cause of action could satisfy the Skelly Oil doctrine and establish jurisdiction over a declaratory judgment action. The Second Circuit concluded that jurisdiction was proper because the court would have had jurisdiction over Aqua Marine’s hypothetical coercive suit to enforce the maritime confirmation contracts. This decision is significant because it reinforces the federal government’s strong interest in resolving admiralty suits in federal court and affords admiralty litigants the same opportunity to take advantage of the Declaratory Judgment Act to expeditiously and economically resolve legal disputes.

Turning to the merits of the case, the Second Circuit held that the district court had incorrectly dismissed the action because it prematurely resolved disputed factual issues as to whether CMR had actual or apparent authority to bind GFK to the confirmation contracts. Accordingly, it vacated the district court’s dismissal and remanded the matter for further proceedings.

Although not a surprising ruling on the merits, the Second Circuit’s decision to extend the Skelly Oil doctrine to declaratory judgment actions brought in admiralty is praiseworthy. In light of Garanti Finansal Kiralama, A.S. v. Aqua Marine & Trading Inc., federal courts will be able to issue declaratory judgments to resolve claims more expeditiously and economically for litigants who utilize arbitration clauses in contracts specifically to avoid the hassle and costs of litigation. Although courts and commentators have expressed concern about the Declaratory Judgment Act, particularly because such a judgment can have res judicata effects, federal courts should not restrict a doctrine that promotes judicial efficacy merely because one or both parties to the action happen to be involved in maritime commerce. As the Second Circuit correctly noted, restricting the Skelly Oil doctrine to matters only involving federal question jurisdiction would effectively bar parties from enjoying a federal rule that both the courts and the United States Congress have made clear should be liberally construed.